All the ways we subsidize growth

Chuck Marohn presenting at the ULI YLG Annual Program

Chuck presenting at ULI YLG Annual Program, image from @ULIMN

A few weeks ago, I attended the ULI Minnesota program “Kicking the Habit: Unsustainable Economic Growth” that featured contributor Chuck Marohn delivering his Strong Towns message. A brief plug – if you’re not a member of ULI, I recommend it. It’s one of the few professional organizations in the land use field that tends to draw a wide diversity of perspectives: planners, engineers, architects, elected officials, academics, all to the same events.

If you’re not familiar with the Strong Towns message, it goes like this (very briefly summarized): The current model of financing the development of our cities and towns is unsustainable, we’re too reliant on intergovernmental transfer payments (federal government paying for highways) and public and private sector debt, and city managers, developers and city councils are not planning for the second lifecycle of infrastructure. The other key part of this is that many of the places we are building are not sufficiently financially productive to pay for the long-term maintenance costs of the infrastructure created to support them. Things are fine through the first lifecycle, but when it comes time to rebuild, there isn’t enough in the coffers. Some cities can escape this dilemma in the short term by using new growth to finance old, but as Chuck said, you can’t make up losses on every transaction by selling in more volume.

While I started this post with the intention of reflecting more broadly on the Strong Towns message (something I may save for a future post), my thoughts kept returning to one piece of Chuck’s talk. In Chuck’s presentation, he talks about transfer payments as a “mechanism of growth“, or in other words, a method that cities use (rightly or wrongly) to hide the true cost of development. Chuck talked a lot about the federal debt and federal transfer payments (like interstate highway building or grants for megaprojects). However, I would argue that our local transfer payments probably swamp anything coming from the federal government, and getting to a state that would allow the most productive places to shine and the least productive perhaps even to fail, would take a significant restructuring of our state and local governments.

In Minnesota, we build roads really well. If you look at the metro area, we’ve created a system where despite wide differences in job and housing density, commute times are virtually the same whether you live in Dahlgren Township or Loring Park in downtown Minneapolis. We also have a semi-famous regional government that makes connection to the same wastewater system easy, no matter where you are in a 7-county region that includes both farms and skyscrapers. All these things (and more) are made possible by shared resources, often collected from one area or community type, and sent to another with a different character. Somehow we’ve determined that this is a good thing (for ease of access, equity, environmental protection, political will, etc) As I listened to Chuck I thought, “you’d really have to remake how local governments interact if you wanted to promote (or even test) the idea that our “most productive places” should be differentiated from our least productive.

I won’t attempt to figure out how this can be done. But I think it’s valuable to think about all these “transfer payments”. There are more than most people ever think about. So, here goes:

  • Federal projects. Obvious.  Chuck mentions this specifically in his presentation and talks about it a lot on his blog. This includes interstate projects, but also transit, bridges, power plants, the post office, and airports. Even with all this, I’m willing to bet this is small fry compared to local transfers.
  • State projects. Mostly roads, like State Aid highways, but also some transit, assorted stadia, and other bonding projects. Obviously, people like these transfers as it allows them to conduct intrastate travel, like going to the cabin or to another city for business.
  • Local Government Aid. While this is technically a “state project”, I thought it deserved a special bullet since it’s kind of unique for Minnesota. State funds are redistributed to cities and counties via a formula, which pays for all kinds of things at the local government level, like police and fire service. Per capita, this aid is not distributed fairly, with more going to rural areas.
  • Regional projects. In the Twin Cities, we have a regional wastewater system funded by all the users. Each time a new development connects to the sewer system, they pay a fee. Some would argue that our current fee structure asks too much of urban infill and redevelopment projects (where sewer infrastructure has been in place a long time, and is likely paid for) and too little of urban fringe projects. I don’t know if this is true. However, our regional government also sets minimum densities at which fringe development can occur, assuring that all users must support low-density development patterns, whether they are financially productive or not.  In addition, we have a regional transit system funded by the state, sales tax, and rider fares.  Suburban services, such as opt-out providers, often have more subsidies per rider than urban service.  The sales tax collected to fund transit also does not include all seven counties, but anyone can ride the system (and road users benefit from decreased congestion).
  • County projects. While the state spends a lot on roads, counties may transfer even more from areas of high productivity to low. While building roads to transport agricultural products is likely a desirable transfer, providing access to every township subdivision may not be. I’d guess most county transportation departments see their mission as providing good access to all parts of the county, regardless of the development pattern. I wager that Chuck would say many of these development patterns are not financially productive.
  • School district projects.  School districts can span multiple municipalities, and collect revenue via property taxes.  New schools are often cited in unproductive and unsafe places, as Chuck points out.
  • Energy utility infrastructure.  In Minnesota, the state determines electricity rates, and all customers in a class generally pay similar rates, regardless of location.  Live on the end of a long cul-de-sac of distribution lines with few other customers?  You pay the same rate per kWh as someone in a dense area, even though you are the only one making that long connection necessary.  Electric and gas infrastructure in dense areas is also the oldest, meaning most of it is already paid for, so urban residents are likely subsidizing construction of new fringe infrastructure.
  • Intra-city transfers.  There are also many of these, but city size, shape, level of developed-ness, and age means these can vary.  Also, the focus of this post is how our intergovernmental system enables unproductive places.  Chuck does a good job exploring some examples of how this might happen at his blog, like in this post about Fleet Farm versus a traditional downtown block.

This list is very likely not comprehensive.  A system of transfer payments between local governments is inextricably linked to the modern development pattern.  Some transfers are probably a good thing.  We’re accustomed to a certain level of infrastructure parity across the landscape.  However, if we want to start to prioritize “productive” places, we have to look way beyond federal payments and take a hard look at local policies.

Your turn: what are other intergovernmental payments currently exist? is a non-profit and is volunteer run. We rely on your support to keep the servers running. If you value what you read, please consider becoming a member.

7 Responses to All the ways we subsidize growth

  1. Bill Lindeke
    Bill Lindeke March 21, 2013 at 3:19 pm #

    I did a bit of digging just now. As best I could determine, MN receives about $500M / year as part of the Federal highway trust fund. Our annual state budget is something like $16B / year.

    • Charles Marohn March 21, 2013 at 10:08 pm #

      That’s the total budget. I believe Mn/DOT’s budget is somewhere around $800M / year, so the trust fund is a large percentage.

      Don’t quote me on that number….I didn’t look it up, but I think that is relatively close.

      • Froggie March 25, 2013 at 7:27 pm #

        In short, MnDOT’s budget is higher, and FHWA contribution is lower. MnDOT has typically provided a very detailed annual breakdown of transportation funding sources, but unfortunately the most recent one they have is for FY 2010. In that year, MnDOT’s trunk highway construction budget was close to $700M, operations and maintenance ran about $542M, and MnDOT received $473M from FHWA.

        Here’s a pie chart showing sources and expenditures by category, in percentages (alas, no dollar totals) for FY 2011. That year, FHWA contributed about 29% of the total revenue

        Another document located here shows details for the completed FY 2012, the FY2013-15 budget, and FY2016-17 forecast. This is a document they’re required to update twice a year. Of note here, MnDOT’s FY 2012 trunk highway budget (combined construction and operations/maintenance) is just over $1.1B, actually a little less than it was in FY 2010. It jumps noticeably this fiscal year (as does the FHWA contribution), then stabilizes at around $1.25B in the out years. I believe this year’s spike, both for MnDOT’s budget and the expected FHWA contribution ($500M, vice this year’s $394M and less than that in the out years) is due to the start of Stillwater Bridge construction.

        One other neat document I found is the 2012 Fixed Guideways Report, which details out both the construction and operations/maintenance funding for several Twin Cities transit corridors.

  2. Charles Marohn March 21, 2013 at 10:06 pm #

    Thanks for the article, Brendon, and the thoughts.

    I think it is important to point out that I don’t find transfer payments to be a bad thing, per se, but I do have problems with the way we use them for growth. LGA here is Minnesota is a least-bad (if I can use a term like that) way to do a transfer payment because it has no strings.

    I can’t tell you how many times a transfer payment is made for a project that makes no sense (St. Croix bridge being a recent, high profile example) yet the money is “use it or lose it”….it can’t be reallocated to maintaining our existing bridges, for example.

    Many federal-to-local programs have strings and conditions like this. The priorities of the federal gov’t — short term GDP growth and unemployment — are different and often in conflict with the long term priorities of our cities, neighborhoods and blocks.

    • Brendon Slotterback
      Brendon Slotterback March 22, 2013 at 7:34 am #

      Chuck – I agree, some (or perhaps many) transfer payments are probably useful and desirable. I just thought it was interesting to explore what they are and all the ways we might not be able to see which are the most productive places. Thanks for your presentation.

  3. Janne March 22, 2013 at 12:18 pm #

    I want to highlight three of my favorite examples of intra-city transfers — from Minneapolis to the rest of the Twin Cities metro and a lesser extent the entire state.

    First is the Minneapolis park system. It’s incredible. It’s a destination. And it’s paid for almost entirely by Minneapolis residents. (I can’t tell you how many times I’ve heard suburban visitors complain that they have to PAY to PARK to go to the park. *sigh*)

    The second is the myriad of entertainment opportunities in Minneapolis. Some of the most obvious are theaters and museums, like the Guthrie and MIA. This also includes entertainment districts like Uptown, Dinkytown, or First Avenue — restaurants and night life, where the largest transfer is streets/parking. Sporting events fall in here, too.

    Third, we have educational institutions. The U of M is gigantic, of course, but there are many post-secondary non-profit or public examples.

    A lot of these amenities — the parks and theater/music/museums in particular, and the U — are non-profit places that don’t pay property tax, and some of them receive local subsidy for capital projects.

    As a Mineapolitan, I’m really happy to have these amenities close-by and to share them with anyone else who wants to use them. That said, I also really, really wish that those visitors would chip in and help pay for them in some way.

  4. Matt B March 29, 2013 at 10:46 am #

    I hope this isn’t too tangential, but with regards to LGA transfers (and Fiscal Disparities to a lesser degree), I wonder: How much are we paying to keep outdated and arbitrary municipal boundaries in place? How much are we paying to allow West St Paul and South St Paul to remain separate municipalities? Same goes for Crystal & New Hope, Mendota & Mendota Heights, Newport & St Paul Park, Maplewood & North St Paul, Columbia Heights & Fridley, and especially all of the little Lake Minnetonka micro-burbs. These borders have little value in a fully developed metropolitan economy, other than historical and emotional value.

    I agree with Janne’s comment above that Minneapolitans are paying far too large a share towards keeping regional amenities running, the Vikings Stadium being the latest example of that. That’s a huge mess of downtown land that will not pay any property taxes. With regards to the Parks system, the Minneapolis Park Board does receive funding from the Met Council’s regional parks fund, but I am not privvy to the details and it’s probably a safe bet that it isn’t enough. Why not transfer some of the larger parks to the Three Rivers System for more equitable regional funding? I’d start with Theo Wirth, given that it’s already regional in nature and most of it is not even in Minneapolis city limits.

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